2008 All Over Again? | Coronavirus 1 | Markets Are Dumb 10

I’m not kidding when I say I’ve been agonizing over Coronavirus for months. It’s really quite infuriating how hard it was to get good solid information. China looked terrifying. But all market and government sources in the US seemed pretty relaxed. A couple weeks back only the US government was relaxed, while media was waking up to the shock. It was only two weeks ago that the markets began to reflect what was happening. Now everybody is losing their shit, just as China seems to be recovering. It’s all a mess.

When it comes to history, I usually know as much or more than any journalist I am reading. That’s not the case with diseases and epidemiology. It seemed like everything I read contradicted the last thing I read, making it impossible for me to say anything definitive. Eventually I gave up on talking about the disease. It’s too late to warn folks, we are now at the crisis, which is what today’s video covers. I feel like I’ve kind of let the viewership down. I knew this was coming for a while now, but I’m only now adding to the panic pile with this video. Guess I should bone up on biology for the next plague.

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Video Transcript after the jump…

Hey There. I have no idea what is going on with the Coronavirus. For two months now I have been trying to figure out what to say about this and you know what? I am not a scientist. There are plenty of people in US government and media who are not scientists who are trying to explain things, and I dont think they are helping. So rather than add to that mess, I am going to talk about some stuff I do understand. The economic effects of this are disastrous and they are only going to get more disastrous.

The decade or so since the financial crisis in 2008 hasn’t been great for most people in the developed world. But it’s been amazing for the small classes of people who can access and benefit from Financial markets. It’s been an almost unbroken story of success and growth since Obama came into office and stabilized things in 2009. It’s been the longest economic expansion in US history. Not so great for workers, but amazing for investors.

This stability in financial markets has been very good in some respects, but it has also let a lot of stupid things continue. If anybody with money can make money, just by having money, then A: There isn’t much call for real innovation, and B: a lot of businesses and practices that should have ended long ago, just keep going. If you’re at all familiar with the WeWork fiasco, you know exactly what I’m talking about. I’ll link to my video on that debacle at the end of this one.

Well on Monday February 24th, the party ended. Worldwide stock markets proceeded to have their worst week since 2008. I saw figures stating that 6 trillion dollars of value were wiped away in just that first week. As the Coronavirus spreads across the United States, and the damage to world wide supply chains becomes clearer, I expect things to fall further. In the first week, all of 2019’s miraculous market growth was wiped away. On Tuesday March 3rd the US Federal Reserve slashed interest rates in a rare emergency move. Nobody can predict how far things will fall, but my guess is it’s a lot farther.

Now even if Donald Trump and his crack team of business news journalists have got it right, and the world’s scientists have got it wrong, and this new coronavirus thing is all about to blow over, I am afraid the damage is done. As I have been talking about since the beginning of my markets are dumb series, confidence is absolutely essential to the smooth functioning of almost every market in our economy. And that confidence has been shattered.

China is where this started, but it’s not where it will end. Shutting down the world’s workshop was always going to have some pretty bad effects. Some thought we had some precedent for this. Back in 2002 and 2003, the Sars virus was similarly disruptive to the Chinese economy. Back then, China missed a quarter of growth, but then jumped back to its meteoric rise. There are reports indicating that a recovery may be beginning in China. But China is a much different animal than it was 17 years ago. Back then it was around 4% of world GDP, now it’s 16.3%. Back then China was mostly making T-shirts, now it’s deeply tied to all the world’s most complex industrial supply chains. China skipping a quarter of growth today doesn’t mean a few adventurous business people lose their shirts, it means massive destruction of demand and confidence, for the whole economy. Even if Coronavirus had never made it out if China we would have been talking global recession.

But this disease and it’s panic is now spreading throughout the world. Italy just shut down the core regions of its economy for a month. Texas’s South By Southwest, one of the world’s most prestigious tech and media conferences, has been canceled. What we are seeing here is a calamitous drop in confidence. Most of this drop in confidence is related to disease so far, but now it’s extending to everything else.

WeWork is only the most famous company that has been running on fumes over the past ten year’s expansion. There are plenty of sexy new tech companies, like Uber and Lyft, that only exist because there was so much spare money to invest lying around. But there are also plenty of more traditional industries that have relied on paying off debt with more debt when money was easy to find.

It’s a new world now. And we are going to see a range of business failures, large and small, that will lead to a series of economic dominoes falling, all over the world. Welcome back to 2008. Already, with staggering speed, we have seen extraordinary ramifications for the oil industry. Come back next time for Coronavirus part 2: Saudi Arabia Goes To War